Essential ESG: Episode 5 – The ‘E’ in ESG

Phoebe Wynn-Pope, Head of Responsible Business and ESG

Louise Camenzuli, Head of Environment and Planning and Lead, Climate Change and Sustainability Working Group, Responsible Business and ESG

Phoebe: Welcome to another instalment of the Corrs Essential ESG podcast. This podcast is coming to you from the Lands of the Boon Wurrung / Bunurong People of the Kulin Nation and Gadigal People of the Eora Nation. My name is Phoebe Wynn-Pope and I’m the Head of Responsible Business and ESG at Corrs and my guest today is Louise Camenzuli, Head of Environment and Planning at Corrs and also the lead in our Climate Change and Sustainability Working Group from the Responsible Business practice. Today we’re going to be talking about the ‘E’ in ESG. Louise, what is that ‘E’ piece?

Louise: Good morning Phoebe. Well, we are of course talking about the environmental aspect of ESG. Just as there is no universally accepted definition of ESG the precise scope of the ‘E’ in ESG is evolving. But plainly the ‘E’ includes a sharpened focus on climate change and sustainability issues. So I thought today we might talk specifically about some of the big issues we are seeing in relation to climate change, natural resources and pollution and waste. These issues need to be considered in an integrated manner with social and governance issues.

Phoebe: Yes that’s right that integration piece is fundamental but today focusing on ‘E’ in ESG and climate change, amongst other things, the Paris Agreement, the IPCC’s Sixth Intergovernmental Assessment Report and last year’s Glasgow Climate Pact at COP26 has shown us really that climate change is well and truly scientifically accepted and a mainstream issue for government and the private sector to address. How have you seen this acceptance translate into action?

Louise: Well, Phoebe plainly climate change is now not an issue that the private sector or the public sector can ignore. In fact, we are seeing the private sector tackling climate change head on, particularly in respect of calls for transparency in emissions disclosures, developing a set of baseline reporting standards and reallocating capital to sustainable funds. Regulation will undoubtedly increase in Australia and expectations from stakeholders are changing around the responsibility of business to mitigate climate change and with pressure being put on States and business to work towards achieving the Paris Agreement target of net zero by 2050, all businesses really need to be thinking about their carbon footprint and preparing for changing disclosure requirements. The global trend is for corporations that meet certain thresholds to disclose emissions. Increasingly, this includes Scope 3 emissions, which are emissions that occur within a company’s value chain, differing from Scope 1 direct emissions within operations and Scope 2 indirect emissions from energy consumption.

Something that is interesting and new Phoebe is the emergence of a new category of emissions known as Scope 4 emissions. This is the label being given to avoided emissions. It is also a label used, albeit less so, to describe emissions associated with working from home. Consideration should start to be given to how you monitor, track and report such emissions using accurate data.

Phoebe: Yes it’s getting increasingly complex. Can you explain to us how corporate emissions disclosure is being regulated in Australia and internationally?

Louise: In Australia corporations registered under the National Greenhouse and Energy Reporting Act who reach a certain emissions threshold must report their greenhouse gas emissions annually. At the moment reporting entities are only required to report Scope 1 and Scope 2 emissions and not Scope 3 emissions. However, with the recent change in Federal Government there is potentially scope for a change in the reporting requirements under the Commonwealth regime. This is an area that we will be watching with interest.

Separate to this regime both internationally and in Australia the Task Force on Climate Related Financial Disclosures or TCFD has published recommendations which are regarded as a leading standard in climate risk disclosure. In some overseas jurisdictions these recommendations have even been adopted into law. Now the TCFD recommends organisations disclose Scope 1 and Scope 2 emissions and, if appropriate, Scope 3 emissions. Now while not yet mandatory or adopted into law in Australia the TCFD has been recognised by Australian regulators as an appropriate framework for climate risk disclosures. For listed entities in Australia such disclosure is becoming an increasingly integral part of complying with the obligation to disclose risks to investors under the Corporations Act. Director’s duties are also engaged in respect of managing risks arising from climate change.

Now as well as the TCFD other important disclosure frameworks are emerging around the globe. One that is definitely worth mentioning is the SASB developed by the Sustainability Accounting Standards Board which tracks ESG issues and performance across 77 different industries and appears likely to become the disclosure standards of choice for many companies in the near future. An obvious metric of the SASB Standards relates to greenhouse gas emissions, but this is just one of the many issues within ESG that companies are expected to investigate and report on.

Phoebe: Thanks Louise it’s just a tangled web of extraordinary complexity for organisations trying to think about how to go through all of those different regulations and requirements, the voluntary and the mandatory and the increasing regulation. Clearly the nature of the disclosures for business are evolving and particularly in other jurisdictions like the European Union where businesses have to disclose material matters to the market there is a concept of double materiality isn’t there. Can you talk us through that, what that concept is?

Louise: Sure. Keeping it simple there is the inward-looking reporting or financial materiality. Financial materiality is determined by assessing the impact of sustainability issues on the performance, position and development of the business. The TCFD and SASB frameworks both fit into this category as they focus on sustainability information that is financially material for a company. And then secondly, there is the outward looking reporting or impact materiality and this is determined by assessing the materiality of the impact of the business on external factors, being people and the environment.

Phoebe: People that have been involved in any form of financial reporting will be familiar with the concept of financial materiality but can you provide us with some insight on how impact materiality reporting requirements might play out in Australia?

Louise: Okay so it’s very possible that double materiality will become a baseline expectation for corporate disclosures in the near future. For example, the development of the biodiversity equivalent to the TCFD, the task force on nature-related financial disclosures or the TNFD, is incorporating the concept of double materiality into its framework. A practical example of that might be that a material financial risk to crop farming is pests, which are caused by imbalances in the ecosystem and reduced production. But equally a material impact of that farm is the effect that clearing of vegetation to make room for crops will have on biodiversity, which could also cause financial and other risks for different companies and the broader society. So the idea of double materiality reporting is that both of these impacts are disclosed to get a complete understanding of a company’s role in the environment. France has actually already introduced this concept into a regulatory framework known as Article 29 and this requires financial institutions to report on biodiversity related risks in addition to climate change and to disclose strategies for reducing biodiversity impacts.

Phoebe: That’s super interesting, thank you Louise. It’s really clear from these trends that prudent Australian businesses should be starting to prepare for double materiality standards to become mainstream perhaps in the near future, or at least be thinking about those different kinds of impacts that they’re having in the environment. Aside from disclosure there are clearly other climate-related issues businesses should be aware of and one of them which seems to be an increasing issue is around climate-related litigation. Can we just touch on that briefly?

Louise: Well plainly climate change litigation is continuing to grow globally and Australia is no exception. This is a topic Phoebe that we could talk about for hours so I will do my best to keep this short. In summary, we’re seeing mixed outcomes from this litigation but increasing success for environmental advocates in many countries.

Generally speaking climate change litigation has been categorised into four types. The first probably being litigation against governments to force action to reduce greenhouse gas emissions, such as the much publicised Dutch Urgenda case in which the Supreme Court of the Netherlands compelled the Dutch government to implement an action plan for limiting greenhouse gas emissions and to reduce emissions by 25% by the end of 2020 compared to 1990 levels. Of course in Australia we had the Sharma decision last year, which looked at whether the Minister for the Environment owed the children of Australia a duty of care to protect them from the health risks associated with climate change. This duty was found to exist at first instance but was overturned on appeal. Now although the applicants in the Sharma case were not successful it remains to be seen whether similar types of arguments could be successful in other contexts. The Papai case is one to watch in this regard. This is a class action that has been brought by a group of Torres Strait Islanders against the Commonwealth Government on the basis that the Government owes a duty of care to the plaintiffs to take reasonable steps to protect them, their culture, traditional way of life and environment from the harms caused by climate change, particularly rising sea levels. Now unlike Sharma, the duty is alleged to be owed to a more specific group of people and the impacts are plainly more demonstrable.

The second category of cases involves challenges to high emissions project approvals and this includes rights based and tortious claims. Sharma sits in this category as well. Another example is Waratah Coal and Youth Verdict, which is a matter yet to be determined. Youth Verdict has brought a rights-based claim objecting to the grant of the mining lease and environmental authority for the Galilee Coal Project in Queensland.

A third category is actions against companies, directors and advisors relating to disclosure or assessing and acting on climate risks and these are actions that are taken against companies and possibly directors for failure to adequately disclose climate risks to the market. Claims have so far been for declaratory relief and injunctions. For example, a claim against superannuation fund Rest for inadequate climate change disclosures. The proceedings in that case were resolved through concessions by Rest before completion of the hearing. Related to this are greenwashing claims which involve the practise of misrepresenting a company’s green credentials and we have seen various assertions of greenwashing in the press over the past year. These claims can relate to financial and other disclosures relating to risk, broad corporate goals and green marketing. For example, advertising an investment as green when it’s not. The issue is on the radar of regulators with ASIC, just very recently, issuing an information sheet on greenwashing in respect of sustainability-related investment products.

Finally, the fourth category involves actions against major greenhouse gas emitters. One of the most significant examples of this is the Royal Dutch Shell decision in 2021 in which the Hague District Court ordered Shell to bring its corporate policy into alignment with the Paris Agreement requiring a reduction of emissions by 45% by 2030 compared to 2019 levels. In Australia cases against major emitters have more sort of tended to centre around individual project approvals rather than the overall activities of a company, but we may well begin to see the emergence of similar corporate responsibility type claims like the Royal Dutch Shell case in the future.

Phoebe: Yes I think we will definitely have a whole podcast dedicated to that because there is a lot to unpack in there and we also know that ASIC and APRA are really keeping an eye particularly on the greenwashing issue. We need to really focus in on that in a much more extensive way. If we move on from climate change to natural resources, businesses and governments take emissions reductions seriously and we’ve already seen the widespread regulation of emissions both mandatory and voluntary participation in carbon markets as a result. Nature loss, you have touched on that already but can you just tell us a little bit more about that?

Louise: Yes, so climate change and its impacts are increasingly on the radar of corporate boards as a risk that requires integration into short and long-term ESG strategies. However, intrinsically related and often overlooked are the risks and opportunities of biodiversity to a corporation. I touched on some of these things during the discussion on double materiality earlier, in addition to improving corporate disclosure obligations, nature positive has emerged as a new ambition which is underpinned by a recognition of the value of nature to our economy and society. To underscore this Phoebe, the World Economic Forum found in its 2020 report that 44 trillion US dollars of economic value generation, being over half of the world’s total GDP, is moderately or highly dependent on nature and its services.

Two key concepts to this understanding of the value of nature are nature capital, which is the world’s stock of natural assets and ecosystem services, the services that flow from these natural assets that are valuable to humans. Law and policy is already evolving to incorporate these concepts. For example, the New South Wales Government recently released its Natural Capital Statement of Intent expressing an intention to integrate the concept of natural capital into government decision-making. And then also the recently introduced UK Environment Act has introduced a requirement that there be a 10% biodiversity net gain as a condition of all planning approvals. So it’s clear that nature positive is a concept that is gaining momentum similar to the way in which net zero has developed over the past two to three years. Now as mentioned earlier a framework similar to TCFD is being developed for biodiversity disclosures called the TNFD. The task force is currently in the consultation phase and is developing the framework with the final version to be released in 2023. As with the TCFD we expect that the TNFD framework will be widely adopted including by business in Australia. It is really essential for business to stay ahead of the curve and consider now how it might put into place systems and reporting frameworks to adapt to any TNFD framework.

Phoebe: It’s a fascinating area and emerging, and it’s obviously a problem for the world that it’s taken so long to be thinking about nature biodiversity loss in this way. There are carbon markets Louise, are there also markets for nature or is that something that’s going to develop?

Louise: Absolutely Phoebe. We are seeing the emergence of different types of nature markets in Australia. Australia is plainly a biodiversity rich country and the development of these new markets represents great opportunity for many industries and a means to further abate carbon emissions. In this respect water markets and even biodiversity markets have operated in Australia for many years. In New South Wales we currently have a biodiversity offsets scheme which permits impacts on biodiversity caused by a certain action such as say the development of major infrastructure to be offset through the purchase and retirement of credits which are created by landholders who undertake conservation projects or pay money into the Biodiversity Conservation Trust to fund future conservation efforts. Carbon markets have existed for some time and are now quite well established also. However, there is a new focus on abating carbon through biodiversity conservation. New methods of credit generation are being developed that rely on nature. For example, blue carbon, which is the storage of organic carbon in coastal wetland and marine ecosystems, was recently approved as a legitimate carbon farming method eligible for abatement credits under the Commonwealth’s Emission Reduction Fund Scheme. Private landholders really do need to be alive to these new opportunities Phoebe so as to take advantage of the financial incentives for land restoration or conservation that they present.

Phoebe: There’s so much going on, it’s just fascinating to hear you talk about all of these things. Thank you. Another area which is obviously impacting the environment and I think there is an increasing consumer awareness of is around pollution and waste, isn’t it. It’s kind of a focus for ESG, good ESG management and there have been a few new developments in this area, is that right?

Louise: Yes, so pollution businesses should be taking a holistic look at their pollution footprint. That includes air, water, land pollution, again across the full supply chain. Avoiding or reducing the release of pollutants wherever possible is an important aspect of improving environmental performance. It is important that business stays ahead of all of these things by managing emerging pollutants that might not yet be regulated, but have been found to have human health impacts.

Technologies are also emerging for managing pollutants that could be employed, for example via upgrades to facilities. Apart from seeking to avoid non compliances in any related regulatory action businesses may wish to, as part of their environmental management strategy, also consider additional remediation or compensation measures that address the environmental and health impacts of pollution. Implementation of these types of strategies will go a long way towards addressing reputational issues and stakeholder demands.

Phoebe: And then we have the issue of waste. I wonder if you see that as an area where a beyond compliance kind of approach might be easier to realise?

Louise: Yes, I would say sustainable waste management is an area where businesses can have an easy win in improving their ESG performance. This involves measuring, reporting on and minimising waste. To improve ESG performance businesses should aim to reduce waste and achieve circular waste business practices with net zero waste. Transitioning to a circular economy is firmly on the agenda across Australian jurisdictions and internationally. Other hot topics in waste at the moment include recycling food organics and garden organics, also known as FOGO, and generating energy from waste. Neither of these are complete solutions to the waste dilemma obviously, but rapidly improving technology could mean that they go a long way to reducing the amount of waste that ends up in landfill.

There are also developments, Phoebe, in policy and regulation for specific waste streams including plastics, food waste, textiles and e-waste. A real difficulty is going to be looking at these more challenging waste streams in a more circular fashion so that all waste is considered to have value as something that can be refined and repurposed in manufacturing rather than as a liability requiring disposal.

Phoebe: And that speaks to the concept of a circular economy and what that looks like for the future which will be another good topic for our podcast series I think.

Louise: Yes that’s a really big topic and it’s an exciting topic so I look forward to having that discussion with you Phoebe on a separate occasion.

Phoebe: Louise I think this has been fantastic. There’s things like environmental performance that we should be talking about, but again there are so many opportunities there and I really want to pick your brain on that topic in a separate podcast because the way businesses are going to be thinking about the advantages that they can take and the opportunities that there are in good environmental performance will be critical in the future, won’t it?

Louise: I would say environmental performance is undoubtedly being increasingly scrutinised by regulators and stakeholders. As a consequence Australian business should expect increased environmental regulation and we are fast moving from more voluntary to mandatory disclosures regarding sustainability matters. Both the private and the public sector should be alive to these risks, but also the many opportunities in the environmental space. For example, through an analysis of supply chain relationships in the shift to less carbon-intensive activities, and in the context of making net zero pledges that extend to Scopes 1, 2 and 3 emissions, there are real reputational and social licence gains to be made in business exceeding expectations and minimum reporting requirements. Finally, I have to reiterate, as you well know, that environmental aspects of ESG do not and cannot sit in isolation to the ‘S’ and the ‘G’ in ESG. An integrated approach to the preparation, implementation and review of any ESG framework is essential.

Phoebe: Yes. Definitely talking to the converted and it’s a critical part of the work that we do when we’re trying to look at and address these issues with organisations around the country. Louise thank you so much for joining me today. It’s been fantastic to explore the ‘E’ in ESG and we’ve got a couple more podcasts in sight.

Louise: A pleasure Phoebe. Thank you.

Phoebe: You have been listening to Corrs’ Essential ESG Podcast and if you’ve enjoyed it don’t forget to subscribe wherever you listen to your podcasts so that you get notifications of future episodes.